Yahoo Cashes Out of Alibaba

Yahoo has agreed to sell half its stake in Alibaba back to the company. The Chinese e-commerce giant will pay over $7 billion to Yahoo in the deal. That cash will be routed to Yahoo's shareholders, the company said. "This is favorable for the stock, but none of this does anything to alleviate our bigger picture concerns for the company," said Pivotal Research Group's Brian Wieser.

By Rachelle Dragani
05/21/12 11:01 AM PT

Yahoo will sell half its stake in Chinese e-commerce heavyweight Alibaba back to the company for about US$7.1 billion, setting in motion a deal that will send cash toward Yahoo shareholders.

The deal will take place in multiple stages. First, Alibaba will purchase about 20 percent of Yahoo's stake in the company. The total $7.1 billion would be made up of about $6.3 billion in cash and up to $800 million in new Alibaba preferred shares.

Additionally, if Alibaba goes public in the future, it would have to either repurchase 10 percent of Yahoo's current stake in the company or allow Yahoo to sell those shares in the IPO. Following the IPO, Yahoo would have the option to sell the remaining shares at any time of its choosing.

The companies will restructure their existing intellectual property licensing agreements. Alibaba will continue to operate Yahoo China under the Yahoo brand for four years. It will also pay Yahoo an upfront royalty fee of $550 million and continue payments for four years. As part of the agreement, Yahoo's restrictions on making Chinese investments will end.

Yahoo hasn't finalized how it will distribute the cash it will receive from the deal, but it said it would return the after-tax proceeds to the shareholders.

Yahoo declined to provide further details.

Long Time in the Making

The deal between the two Internet companies comes after years of talks between Alibaba and Yahoo. When Yahoo first made a $1 billion investment in Alibaba in 2005, Jerry Yang, Yahoo's cofounder, and Jack Ma, founder of Alibaba, led the talks between the two.

When Carol Bartz took over as CEO of Yahoo, relations between the companies soured and Yahoo continued to struggle on other fronts in the Internet industry. Following the departure of former Yahoo CEO Scott Thompson over a false college degree appearing in his resume, interim CEO Ross Levinsohn said he was pleased with the deal and believed the Alibaba deal will provide some "clarity" for Yahoo shareholders.

"It is a good thing for Ross Levinsohn as he starts off," Trip Chowdhry, senior analyst for Global Equities Research, told the E-Commerce Times.

For a company that's endured another CEO restructuring in the past few weeks, a solid deal is always welcome, said Brian Wieser, analyst at Pivotal Research Group.

"It's a positive for the company and shareholders certainly," he told the E-Commerce Times. "The framework was largely put in place prior to the events of the last couple weeks, but this is good for all involved."

Doesn't Erase Overall Concerns

However, the Alibaba deal doesn't erase overall concerns about Yahoo's future in the online industry, Chowdhry and Wieser agreed.

"This is favorable for the stock, but none of this does anything to alleviate our bigger picture concerns for the company," said Wieser.

Competitors such as Facebook and Google are outplaying Yahoo in the display advertising game, and a deal that gets Yahoo a good chunk of cash doesn't address those underlying problems, said Chowdhry.

"Yahoo is a company that is bleeding on three fronts," he said. "They are losing on patents, they're losing to Google and Facebook and they're losing market share. A deal with Alibaba and the announcement about what they're going to do with the money does not address any of these three questions."

It also doesn't help that the deal pushes the company further out of China, an area with huge potential growth opportunities, said Chowdhry.

"Alibaba is basically saying, 'Here is your money,' and getting them out of there," he said.

That's not going to help attract the people it needs to make it an Internet leader again, said Chowdhry.

"How are they going to attract the number-one talent?" he said. "Can they be the number-one talent in the Valley?" he asked. "The answer is no. Is this ... deal going to change anything? No. The problem is that Yahoo, instead of thinking about innovation, is thinking about financials, and that's not going to lead to long-term gains."